Japan’s persistently weak yen is emerging as the decisive factor that could allow the Bank of Japan and the government to align behind a long-awaited rate hike this month, according to an analysis by Alicia Garcia Herrero (twitter @Aligarciaherrer)
Despite concerns around U.S. tariffs and broader geopolitical risks, Japan’s economy has proved more resilient than expected. Business sentiment data from the Bank of Japan’s December Tankan survey showed a modest improvement in conditions for large manufacturers, while sentiment in the services sector remained elevated. Even areas exposed to China-Japan political tensions, such as tourism-related industries, have seen only limited deterioration, suggesting external headwinds have so far been absorbed.
Beneath that resilience, however, the weak yen has become an increasingly pressing policy problem. Garcia Herrero notes that while nominal wage growth is picking up, regular wages rose 2.6% year-on-year in October, and services inflation has firmed, real wages continue to fall. Surging food prices and higher import costs are eroding household purchasing power, restraining private consumption and amplifying the inflationary impact of currency weakness.
Inflation expectations remain anchored above the Bank of Japan’s 2% target across short-, medium- and long-term horizons, strengthening the case for further policy normalisation. Core inflation has been pushed higher by food prices, and the yen’s continued weakness around the 155 level against the dollar risks reinforcing imported inflation pressures.
Against this backdrop, Garcia Herrero argues the political calculus may be shifting. The Takaichi government, historically cautious about tighter policy, appears increasingly willing to tolerate a rate hike as the costs of a weak currency become more visible to households. She expects the BoJ to raise its policy rate by 25 basis points to 0.75% at its December 19 meeting.
Looking ahead, she suggests that if the yen fails to stabilise after the move, and continues to weigh on real incomes, the government may also accept further tightening, potentially opening the door to another 25-basis-point hike early next year.
